NZ Funds Market Update #7

Executive Summary

Global share markets are now 22% above their lows.

NZ Funds has successfully mitigated the downside and will continue to fully participate in the share market recovery.

The road to recovery for the global economy will be long.

Returns over the short-term could be soggy as the economic reality of COVID-19 sets in.

Despite short-term headwinds we continue to see 15 – 20% upside in share markets over the next 12 – 24 months.

For those with longer-term time frames, share market returns will be substantially higher.

Click here to read the article: NZ Funds Investment Research – Market Update 7

See how NZ Funds ‘Downside Mitigation’ has helped in the current crisis

We have often mentioned that NZ Funds developed and implemented a downside mitigation strategy following the Global Financial Crisis to protect client’s portfolio values should another major event occur.   The strategy has worked perfectly for us throughout the COVID-19 crisis.

The following link illustrates the point that NZ Funds clients have fared a lot better than other investment managers throughout this recent period of market volatility. 

NZ Funds KS Scheme Downside Mitigation Mar 2020

We have received a surprisingly low number of enquiries from clients wanting to know if they should move out of their Growth fund and into something more conservative, and/or stop their voluntary contributions. These are the main two topics.  

The answer to question one is “you stand to recover values more quickly by remaining invested as you currently are.”

The answer to question number two is “if you can afford to continue contributing then, by all means, do so as you are buying investments on special.”

NZ Funds Portfolio Positioning

NZ Funds’ market views

Global financial markets started 2020 on a positive note. The United States and China signed phase one of a trade agreement while European markets were positive following greater certainty around Brexit. These events removed some of the uncertainty within global financial markets and consequently share markets enjoyed a strong January and early February.

However, the start of this week has seen a sharp ‘risk off’ across share markets following a surge of coronavirus (COVID-19) cases in Italy, Iran and South Korea. Markets are repricing the risks of a potential spread to neighbouring countries.

We will not attempt to be ‘armchair epidemiologists’ but we can say events like this will create volatility. Our experience has shown that during periods when markets enjoy multi-year uptrends, pullbacks of 10% are not unusual and should be viewed as an opportunity rather than a cause for concern. For this reason, a further sell-off would not compromise our longer-term positive views on shares.

Portfolio positioning

Given our more positive view at the end of 2019 we increased our exposure to growth assets which has provided a good positive performance buffer for portfolios going into the start of this week.

Despite this increased exposure, we retain a modestly defensive position with a market beta of 95% which gives us some insulation from the volatility we are experiencing right now.

Over the last few days we have added a hedge to our growth assets which will provide some relief should credit conditions worsen.

NZ Funds’ left tail manager, Universa, seeks to profit from significant market declines and black swan events. Holding Universa in clients’ portfolios has the potential to generate a significant amount of cash during a greater than 20% downturn, which can then be used to buy assets at distressed prices. In our view, this is an ideal way to help compound clients’ wealth over the long term.

We think there is a good argument for geographic diversification and remain invested across the United States, Europe, Asia, Australia and New Zealand.

We have further increased our exposure to active managers who have strong track records of weathering financial market volatility.

Client positioning

Geopolitics will continue to heavily influence global markets. We continue to see an above-average number of cycle-altering and market-moving events transpiring over the near term. Increased tension in the Middle East, the United States election and COVID-19 are examples of such events.

Given the geopolitical uncertainty and nervousness around COVID-19, it is tempting to accumulate cash, postpone investing or pause a regular savings programme. Such decisions are likely to leave investors worse off over time.

It is extraordinarily difficult, if not impossible, to time markets. There are always ‘events’ which provide a reason not to invest. However, years out of the market can result in lower average returns than remaining invested and experiencing a downturn. We therefore recommend clients continue as usual as our investment approach will help to mitigate a downturn. At the same time, as in the past, any downturn should also be relatively short-lived and may provide opportunities.

James Grigor is Chief Investment Officer at New Zealand Funds Management Limited (NZ Funds). His comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.

Using an adviser adds more than 5% to a client’s portfolio

The following article is taken from Good Returns – NZs Financial Adviser News Centre, published Tuesday 26th November 2019.

We feel it accurately reflects our ethos and believe it’s well worth reading.


The value of advice has been quantified in a new report produced by Russell Investments.

It shows that an adviser adds 5.2% to a client’s portfolio. The firm conducts this research in the United States and Australia, and has just completed a New Zealand version of the work.

Russell New Zealand managing director Alister Van Der Maas says New Zealand advisers add more value to their clients than their counterparts in other countries.

The report measures value add in three areas: Rebalancing, Getting it Wrong and Avoiding Behavioural mistakes.

It found most of the value add came from helping clients avoid “getting it wrong” (2.9%), averting behavioural mistakes (1.9%) and annual rebalancing (0.4%). There was also an intangible value in making the process of investing simpler.

The report said the value-added would be significantly more for clients who would not otherwise have had an investment portfolio, were it not for their financial adviser.

While annual rebalancing had the smallest impact, the report said that portfolios that were not rebalanced regularly could end up with significant, and unintended, risks. Rebalancing would add value but also reduce volatility by about 1%.

“A hypothetical 60/40 balanced portfolio launched in 2004 looks very different today, with an asset allocation more heavily weighted to growth assets and significantly more of the portfolio in New Zealand assets than at inception. As a result, this portfolio mix may no longer be appropriate for the investor and it may expose them to significant unintended risks. Knowing when and why to rebalance is key.

“This comes down to advisers having a thorough understanding of their respective client’s goals and risk tolerance as well as the implicit and explicit costs involved. The examples shown, illustrate the value that a disciplined rebalancing approach can add both in terms of risk reduction and return enhancement,” the report said.

Behavioural mistakes, the next biggest driver, were hard for independent investors to catch, the report said.

“Behavioural change begins with personal awareness of their investing behaviour and of the investment biases that may be causing their mistakes. Once clients are aware of these biases, the adviser can be that accountability partner to help them stay on course.”

Russell analysis in the US showed that the average equity investor’s inclination to chase past returns would have led to underperformance compared to the market.

“From December 2007 to December 2018, investors withdrew more money from US stock mutual funds than they put in. All the while, $100 invested in the Russell 3000 Index more than doubled in value. Those that chose to stay in cash during that period missed a cumulative return of more than 200%, based on the Russell 3000 Index.

“We believe an adviser’s ability to help clients stick to their long-term financial plan and skirt irrational, emotional decisions adds this value. It is perhaps the key reason why we are such strong proponents of financial advice,” the report said.

It was avoiding the cost of getting it wrong that added the most value.

“Investing without professional advice can be viewed as an effective way to lower the costs of investing, but this can be a short-sighted and ultimately costly view. For instance, the investor may not set an appropriate investment strategy for their needs, they may lack the skills or time to filter through the many investment options available or they may be tempted to chase performance and over-react to market events,” the report said.

Australian research by Deloitte showed that younger investors were more risk-averse than older counterparts.

“The role of an adviser in helping clients to determine the most appropriate investment strategy to meet their objectives should not be underestimated. Whether the client’s goal is to achieve long-term growth or preserve capital, developing an appropriate investment strategy based on individual risk tolerance, time horizon and investment goals is all important.

“In addition to developing appropriate asset allocations for their clients, many professional advisers also have the capability to build globally diversified multi-asset portfolios, typically using a combination of directly held securities and managed funds.

“Advisers also provide important access to funds and strategies a client may not be aware of or able to access themselves. These include the right active strategies perhaps, complemented with passive strategies like ETFs to keep portfolio costs in check, all while ensuring market opportunities are not being missed,” the report said.

Advisers should not be shy about promoting their value in making clients’ lives easier, the report said.

“Most investors have never taken basic classes in school to learn about money management, let alone had formal training. There is great value in teaching investors how to make the complexities of financial planning, goal-based advice and multi-asset investing strategies simple enough that they will actually want to be a part of helping you help them. In turn, this can create trust, simplicity, candour and confidence in the value advisers deliver.”

NZFunds – What’s happening in the market and what we’re doing about it…

Growth is slowing, geopolitical unrest is increasing and NZ Funds has transitioned clients’ portfolios to a more defensive footing in anticipation of a pullback in global share markets. We have decreased risk across the Growth and Inflation Strategies, locking in the strong gains generated this year.

Market view

Global growth momentum is now slowing, and most major economies have progressed toward more advanced stages of the economic cycle. Global trade growth also moved into negative territory, weighed down by the ongoing United States – China trade war.

Share markets have discounted slowing economic data in the hope that interest rate cuts will help avoid a recession. We have already witnessed larger than expected interest rate cuts in New Zealand, with further cuts likely in the United States, Europe, Australia and New Zealand over the coming months.

While the global economy is slowing, a recession is not a foregone conclusion, especially in the United States. We are anticipating a share market pullback and increased volatility in the near future, but we still expect shares and other growth assets to appreciate and provide better medium to long-term returns than term deposits.

Volatility has increased

As interest rates approach zero, volatility has increased. Triggers are geopolitical, such as the United States – China trade war, Brexit, increased tension in the Gulf and South China Sea and protests in Hong Kong. Only time will tell if interest rate cuts will be enough to extend what is now the longest economic expansion in history.

Portfolio changes

Our defensive strategy seeks to lock in the strong returns generated in our Growth and Inflation Strategies this year. As well as increasing our active versus our passive exposure over the past six months, we have implemented three defensive measures. First, we have reduced exposure to global and Australasian share markets. Second, we have invested in gold, a safe haven, that should perform positively during a global share market retreat. Finally, our downside mitigation manager, Universa, provides protection should markets suffer a violent pullback greater than 20%.

What is our strategy?

Central banks are likely to respond quickly to a significant share market pullback. This would be a buying opportunity for those with an 18 – 24-month view. Thus, our strategy is to buy back our underweight share market position on any pullback greater than 20%.

What if markets recover?

If we are wrong and markets grind higher, clients will continue to participate in an appreciating share market. With no new information we will remain defensively positioned. If there is a major positive catalyst, such as a full and final trade deal agreed between the United States and China, we will close out our defensive positioning promptly and increase clients’ exposure to risk assets. We will not take our focus off our core job to track global share market indices over time while generating sustained incremental returns.

KiwiSaver – Should it be your ‘only’ retirement savings plan?

Should you have an additional long-term savings strategy? Which sits alongside your KiwiSaver account…

Contributing to KiwiSaver what you need to get the maximum benefits and investing in a separate account that sits alongside your KiwiSaver account could be worth considering.

Some of the feature benefits are:

* funds aren’t locked in

* low cost

* Portfolio investment entities (PIE) so no tax return required

* No minimum investment required (nominate a regular savings amount)

* You decide how you want the funds invested

* Personalised financial advice from an Authorised Financial Adviser

To find out more, or book a FREE no obligation meeting call us on 0800 66 66 78

Here is a useful article around changes to KiwiSaver contribution rates that came into force on 01 April 2019.

Upcoming changes to KiwiSaver.

Upcoming changes to KiwiSaver

We’ve been asked lately about the upcoming KiwiSaver changes and when they are due to take effect, so here’s an update.

From 1 April 2019
• Additional KiwiSaver contribution rates of 6% and 10% will be introduced.
• The contributions holiday facility, which will be renamed ‘savings suspension’, will have its maximum duration reduced from five years to one year for all new requests.

From 1 July 2019
• Those aged over 65 will be able to opt-in to KiwiSaver
• The five year lock-in period for new members will be removed (this will only impact members who join KiwiSaver after 1 July 2019 and are aged between 60 and 65)

 The bill with these proposed changes is expected to be passed in March 2019.

Media Release (MR No. 2018-34) 29 August 2018

Helping KiwiSaver members weather investment storms

Markets go down as well as up and good times don’t last forever.

In preparation for Sorted Money Week 2018 the Financial Markets Authority (FMA) is launching an online quiz to help younger KiwiSaver members understand how to react when investments rise and fall in stormy markets.

The FMA is playing its part as one of more than 200 organisations involved in the Commission for Financial Capability’s Money Week. More than 800 activities and events are planned around this year’s theme ‘Weather the storm – financial resilience’.

Simone Robbers, FMA’s Acting Director of External Communications and Investor Capability, says: “Our research on investor confidence shows that those who are more knowledgeable and engaged with their investment are more confident. KiwiSaver members under the age of 30 are the least knowledgeable and confident about their investments.

Over the last ten years KiwiSaver returns have generally been positive. While there have been patches of volatility, younger members of the 18-30 age group have never experienced a major fall in the value of investments in their adult lifetimes.”

The FMA’s online quiz aims to reinforce a number of key messages:

  • It’s normal for the value of investments to rise and fall.
  • You can prepare for downturns in financial markets by choosing the right fund for when you need the money.
  • Lower-risk funds are better if you need the money in the short-term (3-7 years) – for example, if you are planning to use the money for a deposit on a first home.
  • Higher-risk funds are better if you don’t need the money for many years, for example, until retirement.
  • Keep contributing. Your contributions are buying assets at a lower price during a downturn.
  • Get help and advice before making any investment changes. Switching from a higher-risk fund into a lower-risk fund during a market downturn means you lock in any losses.

Earlier this year the FMA promoted a campaign encouraging young women who are KiwiSaver members to check their statements and understand their fees.

The quiz will be promoted through social media and can be found here.



NZ Funds targeting clients’ points of pain

NZ Funds has launched a new pension transfer service with a difference: its nationwide UK pension transfer team are offering to do the transfer advice and processing free of charge, before passing the client back to their adviser to be advised within the context of their usual ongoing advice relationship.


Monday, August 13th 2018, 6:00AM


by David van Schaardenburg


“Just over a year ago we identified two problems in the pension transfer market. First, while almost all advisers have clients with international investments in their client base, the process of advising on UK pension transfers is so complicated and tedious, their advisers were often unable to help those clients,” NZ Funds Principal David van Schaardenburg says.


“Second, when clients were transferred there were a limited number of available investment solutions, many being based on either antiquated schemes or schemes managed by financial advisers, not licensed fund managers. This has come about in part due to the UK’s HMRC deregistering KiwiSaver schemes as QROPs in 2015. A number of the schemes still registered as QROPs also charge significant front-end fees and exit fees. Furthermore some profit from taking hefty currency margins when converting client funds from Sterling to Kiwi. It feels a bit like the fund industry was in the 80’s. Some who do offer a modern Superannuation Scheme to transfer to do not provide a transfer service, leaving it up to the adviser to navigate the complexities and administration of the pension transfer process.”



With the launch of NZ Funds’ UK Pension Transfer Service, to complement the modern cost-effective Superannuation Scheme it launched a year ago, the manager has overcome both points of pain. Advisers can now pass their client on to one of NZ Funds pension transfer team, who will process the transfer (free of charge) and then pass the client back to the adviser. The adviser can then set their remuneration for advising the clients in the usual way such as evaluating client risk profile, their optimal asset allocation, sustainable savings and withdrawal rates plus navigating changes in clients’ financial objectives or circumstances.


Funds transferred from UK pensions are managed through the NZ Funds Managed Superannuation Scheme which now has a strong one-year investment track record. The Growth Strategy delivered a 14.7% return over the last 12 months, and 16.4% since inception as at 31 July 20181. The Scheme also has a choice between adviser directed asset allocation or automated annual lifecycle rebalancing. The lifecycle technology is based on the same proven process used by the NZ Funds KiwiSaver Scheme.


“Feedback to date has been very encouraging. In addition to NZ Funds’ seven nationwide offices, a number of independent advisers have already signed up to the service with several dealer groups now undertaking due diligence on our transfer service,” van Schaardenburg says.


“What is more exciting in our view is that the service has been able to add value from day one to complement the other important international investment transfer service we provide to advisers and their clients being transfers from Australian Superannuation Schemes.”


A recent NZ Herald story on 2 August 2018; “Sneaky life insurance fees catches out Kiwi woman…” highlighted an insidious problem with many Australian Superannuation programs. In Australia, life insurance is often built into the superannuation schemes. You need to opt out to not have it. This type of group insurance has a number of benefits such as lower premiums and in some cases the fact that it will cover pre-existing conditions. However, the insurance coverage will often end when you are no longer an Australian resident. Despite this we’ve found Super providers who have continued to charge clients the insurance premiums even after being advised of member relocation to New Zealand. Through our Australian Super Transfer Service, we have been able to negotiate a refund of premiums, backdated to when the client left Australia.


Many New Zealanders (and recent immigrants) put off the decision to transfer. After all, retirement is still years away and the money should snowball until then. Or so the thinking goes. Sadly, when it comes to UK pension transfers the cost of procrastination can be prohibitive. After an initial four year exemption period, returning New Zealanders and immigrants accrue a New Zealand tax liability each year just under 5% of the final pension transfer value. By way of example, a person who puts off transferring for 15 years from return/arrival could lose up to 16%2 of the value of their savings in tax.


By educating accountants, lawyers and financial advisers throughout the country on how to transfer cost effectively, and by eliminating these points of pain, we are seeing a rising flow of clients reducing or eliminating costs and taxes that might otherwise have accrued. “It is great to be delivering value to advisers and their clients and getting two sets of positive feedback” van Schaardenburg says. “It really is a case of helping New Zealanders (including the newer ones) to make better financial decisions”.




1 Growth Strategy inception date, 25 January 2017. Returns are post fees, pre-tax. Past performance is no indicator of future performance.


2 Assumes GBP/NZD exchange rate 0.52, the Schedule method as the calculation option, the client has other income over $70,000 in the assessable tax year.


David van Schaardenburg is a Principal at NZ Funds. He is also an Authorised Financial Adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.

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